No Required Minimum Distributions for 2009

By: AARP Outreach & Service | Source: AARP.org | 2009 01 26

One bright spot among all the recent bleak financial news is the suspension of requirements for people older than 70 1/2 to make withdrawals from retirement accounts in the year 2009. The one-year moratorium on required minimum distributions (RMDs) from retirement accounts can provide much-needed financial relief for many older Americans. This tip sheet will explain the RMD and the 2009 suspension of the RMD, and will also help you avoid withdrawing from your retirement savings when you are not required to do so.

What is the required minimum distribution (RMD)?

The RMD is the lowest amount that you must take out of retirement accounts once you reach age 70 1/2. The RMD can be delayed beyond 70 1/2 if you are still working, although you must begin withdrawals at 70 1/2 from individual retirement accounts (IRAs) and other retirement accounts when you own 5 percent or more of the business that's offering the retirement plan, even if you are not retired.

The RMD affects the following retirement accounts:

• 401(k)
• Roth 401(k)
• 403(b)
• 457(b)
• Traditional IRA
• SEP
• SARSEP
• SIMPLE IRA

The RMD does not apply to Roth IRAs.

For a given year, the RMD is set by dividing the prior year's retirement account balances as of December 31 by a life expectancy factor. You can find the life expectancy factors from the Internal Revenue Service (IRS). For example, a single 75-year-old taxpayer would find on the IRS's Uniform Lifetime Table a life expectancy factor of 22.9. If this taxpayer had $100,000 in a retirement account as of Dec. 31, 2007, the 2008 RMD would be $4,367 ($100,000 / 22.9 = $4367).

It is your responsibility to withdraw the RMD each year, or you will face penalties. You must take the RMD in the year that you turn 70 1/2, although you have until April 1 of the following year to actually take it. After that first year, you must take the RMD by December 31 of each year. If you fail to take the RMD, the amount will be taxed at 50 percent. 

Why the 2009 suspension of the RMD?

In 2009, individuals 70 1/2 and older are allowed to skip a year of withdrawals from their retirement accounts without penalty. The suspension enables people to leave their money in retirement accounts and grow their retirement nest eggs rather than further deplete accounts that have seen steep declines. 

The RMD suspension also helps to offset the large share of retirement funds that older individuals had to take in 2008 because of the way that RMD is calculated. Required withdrawals were high for 2008 because they were based on account totals as of December 31, 2007, when account values were up after years of stock market gains. As a result, people who waited until the end of 2008 had to take high distributions out of greatly diminished retirement accounts.

Can I take advantage of the 2009 RMD holiday?

Some people will be able to get by without tapping into their retirement accounts, and others will need this money to make ends meet. For most people, the answer may not be so clear. Fill out the section below to help you determine whether you can take advantage of the 2009 RMD holiday. First, you will calculate your 2009 RMD. Second, you will explore ways to increase your cash flow without having to tap into your retirement accounts this year.

1.  My 2009 RMD __________

Most financial companies where you have retirement accounts will give you that information. You can also use AARP's required minimum distribution calculator. Enter your 2009 RMD above.

2.  Cash Flow

For each section below, enter either the decrease in annual spending or the increase in annual income in the space provided. We've provided resources to help you figure this out. If you don’t have an exact figure, make an educated guess.

A.  Cost-Cutting Tips

In these turbulent times, everyone is looking for ways to cut costs and save money. Visit AARP's Quick Tips for Saving Hundreds of $ per Month to see how much money you can save right now.

Cost-cutting total: __________

B.  Work

If you are thinking about returning to work after retirement, there are many flexible work options in addition to full-time work. Consider part-time, seasonal and contract employment. Visit AARP's Work channel for tips and resources for mature workers.  Use the Financial Implications of Going Back to Work After Retirement tool to help clarify your thinking.

Work income: __________

C. Benefit Programs

There are many public and private benefit programs that can help pay for things like prescription drugs, groceries, and transportation. While these programs have income-eligibility requirements, many are available to people with moderate incomes. Use our Benefits QuickLINK to learn about programs available where you live.

Benefits: __________

D.  Reverse Mortgages

A reverse mortgage—a loan against your home that you do not have to pay back for as long as you live there—can provide extra money each month. Be sure to look at fees and whether a reverse mortgage is right for you. A reverse mortgage may not be appropriate if you're looking for money for only one year.  Go to AARP's reverse mortgage calculator to learn more.

Reverse mortgage advance: __________

E. Home Refinancing

If you have a high-interest loan and plan on staying in your house, you may want to consider refinancing. With interest rates being low, you may be able to save a considerable amount of money.  Estimate how much you could save by refinancing your home mortgage.

Refinancing: __________

3.  Calculation

The decision about whether to take advantage of the 2009 RMD suspension is yours. To help you decide, add up your savings and increased income from A-E above:

A.  Cost Cutting           __________
B.  Work                     __________
C.  Benefits                  __________
D.  Reverse Mortgage  __________
E.  Refinancing             __________
              TOTAL =     __________ 

If this number is larger than your 2009 RMD (from 1 above) __________, then you may be able to take advantage of the 2009 RMD holiday.